Get ready for the BULL

Is this the right time to invest? Will the downturn continue? A few simple rules that help you spot the beginning of a bull market



The question, though very simple, raises a naive yet tricky subject — how to read the first signs of a turnaround. Here’s a ready reckoner to help you find out where the seeds of a new bull market are getting sown.

NATURE OF RALLY

First things first. As an investor, your first priority should be to figure out the nature of the rally in process. You must assess whether the market rally is a broad-based one or sector centric. Says Anup Bagchi of ICICIDirect; “You must remember that sector specific rallies cannot get converted into structural bull runs as was the case in 1992 and 2001, where the rally was concentrated towards the old economy and tech sectors, respectively.”

It is advisable to look at the broader pattern of the rally to identify if it is indeed a case of bulls getting back to business. According to Bagchi, though there will be sectors that will outperform every other sector, this outperformance cannot be recognised as a bull run and will not continue for long. The sector centric rallies are generally characterised by the good amount of sector rotation.

VOLATILITY INDEX

Then there is Volatility Index (VIX), or Fear Index, as it is better known. For starters, the index is a measure of the market volatility. It gauges the amount by which an underlying index is expected to fluctuate over the next 30 days. Right now, the VIX is trading in the low 40s on the National Stock Exchange (NSE), which indicates that the equity market can witness a uptrend or downtrend to the extent of 40% over the next month. Typically, a high VIX indicates that investor fear has increased. In a stable market, VIX is generally trading below 10. You can keep a tab on this wonderful tool to get the first clue on revival of a bull run. Once the volatility dips below 20, you will be much more safer investing.

M-CAP TO GDP RATIO

This estimate is a popular method of looking at whether the markets have bottomed out or not. As a rule of thumb, it is believed that when market-capitalisation to gross domestic product (GDP) ratio goes above one, the equity market starts getting attractively valued. “For instance, the average m-cap to GDP ratio for Sensex has averaged between 45-48% and in December 2007, this ratio was 1.78 and the rest is history,” says Bagchi of ICICIdirect.

DAILY MOVING AVERAGE

To judge the first call on a bull market, another parameter you can look at is Daily Moving Average (DMA). In a bull market, the index will be above its 200 simple moving average and stock value (at least major Nifty stocks) will be above its 200 DMA. “As long as Sensex/Nifty/stocks stay below its 50, 100, 200 SDMA, the market is said to be bearish. Once the index is below its 50 SDMA due to bearishness, it will start to bounce back, which in turn takes Nifty/Sensex/stock towards its respective 50 DMA, 100 or 200 DMA,” says Alex Mathew, head of research at Geojit Financial Services.

To explain this phenomenon, Matthew cites an example where spot Nifty is at 2934, Nifty 50 DMA is at 2864, 100 DMA at 3100 and its 200 DMA is at 3822. “In a bear market, as the Nifty is above its 50 DMA will have an inclination to test its 100 DMA of 3100 or sometimes even 200 DMA of 3822. These upward movements are said to be bear market rallies,” he says. According to him, higher trading volumes and low impact cost are main characteristics of a bull run.

OTHER FOOTPRINTS

Apart from the above mentioned yardsticks, there are some other clues that you can look at. Analysts say a take-off in the equity markets is typically marked by low inflation, low interest rates, earning yield to bond yield more than 1.5, historical valuation multiples like price to book value (P/BV) ratio, easy monetary policy, high liquidity, buybacks, dearth of new IPOs and weak hands vs strong hands (retail investors in extremely pessimistic mood selling out to strong institutional

hands). In case of P/BV ratio, it is advisable to look at past data as to how the multiples have expanded or contracted vis-à-vis the inherent value in the balance sheet.

There are, however, a few things that you need to keep in mind. “One, markets would bottom out much before the economy does — typically two quarters in advance to when actual revival in economy takes place — measured by quarterly profits of companies. Two, bull markets are born out of excesses of bear markets and vice versa. It is a cycle since times immemorial and nothing is a perpetuity. Three, bear markets typically last between 18-24 months — we are already into the 14th month of this current bear market and time is just ripe for the next bull run to begin,” says Manish Sonthalia, fund manager at Motilal Oswal Securities.

HOW TO GAIN

All in all, your ideal strategy to gain the most out of an emerging bull run should be to focus on buying fundamentally sound large-cap stocks, against mid-cap or small-cap scrips. Historical patterns show that it is large-caps which lead from the front in any bull market rally. The small-cap and the penny stocks are typically the last to move in any bull market. “Ironically the retail investor play it the other way around,” says Sonthalia.

According to him, sector wise, banking and auto sectors — being direct plays on the economy — are the first to move up. If stock prices of companies in these sectors move up and sustain at higher levels, it is almost a sure sign that the economy is moving up again and the bull market has begun. “These would also have to be substantiated by volume numbers and profits reported by companies in these sectors. If you can move quickly and buy stocks in these sectors early in the cycle, it can give you humungous profits,” says Sonthalia. He refers to the case of Tata Motors (then Telco) which moved from Rs 60 in 2002 to over Rs 900 in the next five years.

Analysts reckon that there are apparent signs that the current bear market may soon end. There is abundant capital waiting on the sidelines to be invested and at the first signs of some stability in the US, Indian markets would take-off. As the old saying goes on Wall Street — No one rings the bell at the peak of the bull market and at the bottom of the bear market. You have to take your own call while committing your capital by sticking to your own style of investing.

BEAR MARKET SYMPTOMS


• NSE volatility index (VIX) remains above 40%


• Volume traded is low


• Many stocks hitting 52-week lows or trading below it


• Continuous uptrend is not expected in the market


• Selective stocks move up

Become your own financial planner

Human life value
If you're a young person and think that financial planning must be undertaken only when you are older, with a family and have greater liabilities in life, you're sadly mistaken. On the contrary, the earlier you start planning, the better.While it may be great to have a financial planner to help you out, there is no stopping you from trying to do this yourself. To help you become your own financial planner, SundayET begins with the basic premise of how to calculate your Human Life Value (HLV), based on which you can plan your further investments.

The Defining number
According to Kunj Bansal, senior vice-president (portfolio management services) at Kotak Securities, "Human Life Value (HLV) is nothing but the money that you are going to make over the rest of your life. It is the present value of all that you are likely to earn in the future." Over a period of time, however, the process of calculating this has been modified to include the element of expenditure. So, in addition to your salary, it also takes into account the amount you are likely to spend in the remaining years of your life.Further elements have also been factored in such as already existing savings and bank deposits while other aspects like the house you are living in and the gold that you possess will be discounted.

Finding your HLV
Arriving at this figure can be as complicated or simple as you would like it to be, depending on all the elements that you include in the process of drawing your conclusions. However, for practical purposes, here’s a very simple way of arriving at this figure. Keep addingStart off with a basic figure such as your annual income. Use this to calculate your remaining earning capacity. For instance if you are 30 and are most likely to work till the age of 60, then you would need to work out how much you are likely to earn over the next 30 years of your life.Add your current savings to this. Savings in this case, would mean what is available to you in the form of liquid cash and fixed-deposits. "Once you have done this, formulate the present value of all the future earnings and you will then arrive at what is called the Gross HLV," says Mohit Thadani, head advisory, wealth management, Motilal Oswal Financial Services.

Begin subtracting
From the gross HLV, you need to deduct the expenses that you are likely to face on a daily basis such as those required to meet household expenses. You also need to factor in the taxes you are meant to pay if you haven’t already deducted it while calculating your income.Also deduct current financial assets from the gross figure. Keep a calculator near you because more subtraction follows. "Next, you will need to deduct all the one-time planned expenditures that you are likely to come across in your lifetime," explains Bansal. For this, you will need to know the approximate amount that you are likely to spend on buying your dream house.If you have kids, you should have an idea of whether you want to set your kid to study abroad or within the country and determine the kinds of costs that will be involved. And then comes the large, but often, unavoidable expenditure that is involved in your child’s marriage. And then, the expenses that could suddenly arise in the case of an emergency.

Net HLV
After all these deductions, the figure that you finally arrive at will be your net HLV or your expected HLV. Based on this figure, you need to plan your investment pattern.According to Thadani "It is imperative for an individual to work out his/her own economic value, so as to create replacement for his/her earnings in case of his/her demise – either through insurance coverage or through utilising his/her current wealth or combination of both."While things may vary according to your risk appetite, the key remains in investing in instruments- be it debt, equity, gold or real estate- which match the time frame that you have in mind and provide you with the adequate returns.

Other adjustments
While the method mentioned above is the most basic, there are a few more points that could come in handy. You would need to make adjustments to the basic calculations to include the possibility of salary rises or even job cuts in the present situation. Some people also include the life expectancy of the spouse while arriving at HLV. Bansal adds "Individuals also need to prepare themselves for a low-interest regime. As the economy develops, individuals should not expect the high rates of interest that they were used to getting in the past."

Ready Reckoner for Tax Planning

Filing of income tax returns is a civil responsibility of all eligible citizens of the country. However the procedures involved bog down even the
best of professionals. We at ETIG make an effort to ease the task of filing return of income (ROI) for our readers. Some of the basic queries and rules that individuals must bear in mind while filing their tax returns are highlighted below.

LAST DATE FOR FILING ROI :For all other assessees who have to get their books of account audited under Income Tax law the last date of filing return of income is Sept 30, 2009, else July 31, 2009. If individuals file their returns after the last date mentioned above, they will be charged a penal interest at the rate of 1% per month of delay. However, if such a return is filed after March 31, 2010, apart from the penal interest, they will also be liable for a penalty of Rs 5,000 PHYSICAL FILING OF ROI: The return should be filed with the Assessing Officer (AO) who assessed taxpayer in the preceding assessment year or to whom the records have since been transferred. The new assessee should file return to the AO, who has territorial jurisdiction over the residence or the principal place of business of the assessee.
FILING OF E-RETURN: An individual having PAN and who has income from ‘salaries’ but does not have income from 'profit and gains of business or profession' and who is assessed in any of the specified city may, at his option, may furnish his income tax return on internet. However it is compulsory for companies to file electronic returns.
ROI OF MINOR CHILD: A minor child is not required to file a separate return of income. However, this income has to be included in the hands of either of the parents, although it might be a small amount of bank interest

Disadvantages of Mutual Fund

Drawbacks of Mutual Funds

Mutual Funds, like every investment, have their own share of advantages and disadvantages. Before you venture out to make your investment in Mutual Funds, it is advisable that you do a thorough study of the pros and cons of Mutual Funds. Just like you can list a number of Mutual Funds advantages, you will find drawbacks of Mutual Funds as well if you do a market research. Some of the common drawbacks of Mutual Funds in India are listed below:

Disadvantages of Mutual Funds in India

There are several shortcomings of Mutual Funds in India. Some of these Mutual drawbacks are as follows:
No Guarantees: Every investment comes with some sort of risk. If the value of an entire stock market falls, it will directly affect the mutual fund shares as its values will also decline, irrespective of the portfolio balance. However, the risks involved in mutual funds are much lesser than buying and selling of stocks on your own. This is because when you are investing through a mutual fund you do not have this risk of money loss.

Taxes: In a typical year, the mutual funds which are most efficiently managed have the capacity to sell anywhere from 20 - 70 % of their portfolio securities. If the money you invest in Mutual Fund earns a profit, you will be required to pay the taxes on the dividend received by you. You have to pay the taxes even if you make your money reinvest in Mutual Fund.

Fees and Commissions: An administrative fee is required by all kinds of funds to meet the expenses. There are many funds which even charge commission on sales or "loads" to pay financial consultants, brokers, financial institutions or financial planners. If you buy stocks or shares from Load Fund, you have to pay a commission on sales irrespective of the fact that you are consulting a financial advisor or a broker.

Risk Management: It depends on the right decision of the fund manager that you will get a satisfactory return or not. This is unlike Index Funds where there is no management risk involved because of the absence of managers.

Advantages of Mutual Fund

Advantages
A Mutual Fund can be defined as a trust wherein the savings of the investors with the same financial goal are pooled in. The collected money then goes for investment in capital market instruments. These can include debentures, shares and other such securities. These investments in turn yield an income. The income and capital appreciation are distributed amongst its unit holders. The advantages of mutual funds are many. Some of the advantages of mutual funds in India are listed below:

Mutual Funds Advantages
There are several advantages of investing in a Mutual Fund and that is why more and more people are taking to it. Some of the major benefits of mutual funds in India are as follows:

Diversification: The top Indian mutual funds create their portfolio designs in such a manner that the interested individuals who invest in mutual funds react differently even under similar economic conditions. This can be explained with an example. An increase in the rates of interest may lead to the diminishing of the asset value of securities in the portfolios. Again, an increase in the value may result to the appreciation in value of the other set of portfolio securities. Over time, a balance is created in the portfolio which leads to an overall increase of the portfolio, even if some security values diminish.

Professional Management: A majority of the mutual funds in India employ the leading professionals in their investments management. These managers make decisions on what securities, the buying and selling of the funds will take place.
Regulatory oversight: There are certain rules and regulations framed by the government which every Mutual fund are required to follow. This is to protect the investors from any fraudulent activities.

Liquidity: Getting your money out from the mutual fund is no difficult task. All you have to do is just write a check, make a telephone call and you are done.

Convenience: Mutual fund shares can be bought via phone, mail, or even over Internet.

Low cost: The expenses of the Mutual fund seldom cross the 1.5 % mark of the investment you make. The Index Funds expenses are usually lesser. Instead, the company stocks are bought by them which are found on the specific index.

Ease of process: Investing in a mutual fund is easy if you are a bank account holder and you posses a PAN card. All you will need to do is fill up the application form, attach the PAN card (for transactions over Rs 50,000), sign the cheque and your Mutual Fund investment is complete.
Well regulated: The SEBI (Securities Exchange Board of India) regulates the India mutual funds for the security and convenience of the investors. SEBI ensures that a transparency is maintained by keeping a strict vigilance on the mutual funds. This keeps the investor informed and helps him/her to make his/her choice. To keep a track whether the investment in Mutual Fund is in line with the objective or not, SEBI demands the disclosure of portfolios once in every six months.

Types Of Mutual Fund In India- Brief Idea

These days, different types of Indian Mutual Fund Schemes have come up which cater to your various financial needs like financial position, return expectations, risk tolerance and others. Here is a list of the different types of Mutual Fund in India
Indian Mutual Fund Schemes

[1]Open-ended Mutual Fund Schemes in India - There is no fixed maturity for the open-ended mutual fund schemes. One has to deal directly with the Mutual Fund for his/her redemptions and investments. Liquidity is the key feature here. Buying and selling of the units becomes convenient at the related prices of the NAV (net asset value). Some of the open-ended fund schemes in India are ING OptiMix Active Debt Multi - Manager FoF Scheme, ICICI Prudential Very Cautious Plan and Birla Sun Life AAF - Aggressive Plan.

[2]Close-ended Mutual Fund Schemes in India - Close -ended schemes are those which have a specified maturity period (which generally ranges from 2 - 15 years). At the time of initial public issue one can make direct investment in the scheme and can also get the benefit of buying and selling of the units. Due to demand and supply in the market plus the policy holders' expectations and various other market factors, the market price may vary from NAV (Net Asset Value). Some of the close-ended fund schemes in India are ING Vysya Dynamic Asset Allocation Fund and Kotak Dynamic Asset Allocation Scheme.

[3]Tax-saving Mutual fund Schemes in India - Individuals, companies, partnership firms, and body corporate are some of the investing parties in the various Mutual Funds available in the market primarily to enjoy the benefits of tax saving. The Indian Mutual Funds are guided by principles of general contract framed by SEBI. It provides certain tax benefits to the fund holders. It is mandatory that tax benefits should be declared in a column which reads "objects of the offering". SBI Mutual Funds, Prudential ICICI and Bajaj Capital are some of the tax saving Mutual fund companies in India.